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November 29, 2005

Telecom Mergers on the Upswing

By David Sims, TMCnet Contributing Editor

A new study from the Boston Consulting Group finds that alliances among telecommunications firms are bucking a long downward trend, predicting that in coming years corporate alliances, particularly among telecommunications, will make a "comeback."

One does not need to look too hard for examples to corroborate this finding:

Yesterday Mobiltek Corporation announced that it has restructured the company, and is now a "global wireless and value-added service telecommunications provider" with three operating subsidiaries. The company also entered into an alliance with SSI-Affinity, a Michigan CLEC and Mobile 10, a music and mobile entertainment company.

With the new alliances, Mobiltek will remain committed to its strategy of becoming a leader for China in the wireless value-added products and services market. China has about 358 million wireless users and is expected to increase wireless users at a rate of more than 17% per year and Mobiltek figured allying themselves with other firms was the way to go.

The Corporate Finance and Strategy practice of The Boston Consulting Group, in their report, finds that this will become much more common in coming years.

This reporter seconds that conclusion, as he writes an occasional recurring feature rounding up news of the latest corporate alliances. The problem is not trying to find examples of the tactic.

Dipping a fist in the telecommunications press release bucket here we find the following:

"Encore Networks, a leading developer of Virtual Private Network solutions, today announced that iDirect Technologies has certified Encore as an application partner in its IP Alliance Program…"

And from Dow Jones: " Orange, the mobile telecommunications arm of France Telecom, Tuesday said it has signed a deal with U.S. mobile operator Cingular Wireless to provide multinational business customers with better international services…"

The BCG's report, "The Role of Alliances in Corporate Strategy," analyzes trends in worldwide alliance formation between 1988 and 2004, comparing them to those for mergers and acquisitions. It includes a focused study of the impact of alliance announcements on the stock price of 233 alliance partners that participated in 103 sample alliances in the United States and Europe.

It also offers case studies of the role of alliances in what it considers three key industries -- telecommunications, airlines, and pharmaceuticals.

According to the report, alliances remain central to competitive advantage in key sectors of the global economy, such as telecommunications and pharmaceuticals: "As more and more companies shift their attention to growth after a period of consolidation and restructuring, it's likely that the upward swing in alliances will resume again. This is a trend that has already begun in some regions of the world."

In order to create successful alliances, however, BCG cautions, a company must understand when alliances make strategic sense and address their distinctive management challenges. "The very characteristics that make alliances attractive also put strict limits on their usefulness," said Kees Cools, executive advisor to BCG's Amsterdam office and co-author of the report.

"Alliances can be extremely useful in situations of high uncertainty and in markets with growth opportunities that a company either cannot or does not want to pursue on its own. In general, alliances where complementary capabilities or resources are shared are the most successful," Cools says. "But the advantages of shared risk are often offset by unclear governance and lack of genuine commitment. For theses reasons, alliances need to be carefully managed."

In addition to analyzing trends in alliance formation, the report also distills lessons for executives on alliance strategy and management. For example, the report introduces a structured process for alliance management, including a ten-point "CEO checklist" for embedding an alliance-management capability in the organization.

And while an alliance can resemble M&A, says Alexander Roos, a manager in BCG's Berlin office and co-author of the report, when setting up an alliance "a company needs to establish clear criteria for exit -- before entering into a partnership."

David Sims is contributing editor for TMCnet. For more articles please visit David Sims' columnist page.